WILL RUSSIA FACE LABOR FORCE SHORTAGE IN THE NEXT 20 YEARS?

(REVISED RESULTS FOR DISCUSSION )

June 14, 2011

Key introductory points

This exercise does not attempt to estimate the contribution of labor migrants to GDP growth in Russia

It clarifies the gap between projected number of labor force of Russian nationals and required number of labor force to achieve targeted level of GDP under various assumptions on TFP growth, labor participation rate (LPR) and investment-to-GDP ratio

To impose reasonable assumptions we first conduct simple growth accounting exercise to estimate labor, capital and TFP contribution to economic growth in Russian Federation over 2001-2010 period for total and non-oil GDP and at country and regional levels We chose Central Federal District (as the largest recipient of labor migrants) and North-

West Federal District (as region with lower share of labor migrant in total employment), together accounting for the bulk of economic activity in the country.

Methodological approach remained unchanged compared to the first draft, with only exception that we have introduced simulations to demonstrate how deficit/surplus of labor force required to achieve a certain rate of long-term economic growth rate changes depending on long-term TFP growth rate

Methodology

I. To estimate input factors contribution to GDP growth we use simple growth accounting equation:

where Y is output, A is TFP, L and K are labor and capital inputs and α is labor inputs share we use GDP (in PPP constant 2000 US$) from the WB WDI as proxy for total output we use actual employment as proxy for labor inputs and share of wages in GDP as proxy for labor share we use capital stock adjusted for capital utilization (in PPP constant 2000 US$) for 2000-2005 from the WB dataset

developed for ECA Flagship Report “Unleashing Prosperity: Productivity Growth in Eastern Europe and Former Soviet Union” (2007)

we estimate capital stock after 2005 using perpetual inventory method

where I is investment and is capital depreciation rate we use Gross Fixed Capital Formation (in PPP constant 2000 US$) from the WB WDI database as proxy for investment we assume that capital depreciation rate is 0.05, which is commonly used in the literature and on average close to

actual numbers recorded in official statistics; however for non-oil GDP we make adjustment based on actual depreciation rates as capital depreciation rate in mining sector in Russia is almost two times higher than for total economy

II. We impose various assumptions on targeted GDP growth, TFP growth, LPR and investment-to-GDP ratio in simulations to estimate potential labor force deficit/surplus under various scenarios

III. We understand all limitations of this model as well as of the data. We use it only to demonstrate how labor force needs in Russian Federation may change in future depending on targeted economic growth rates, targeted improvements in factors productivity, level of participation of working age population in labor force and investment levels; so the Government could address potential labor force shortage beforehand

K

K

L

L

A

A

Y

Y

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Content

Labor force projections under several assumptions regarding LPR Results of growth accounting at country level

Estimated TFP contribution to GDP growth (total and non-oil) over 2001-2010 Required TFP growth over 2010-2030 to achieve targeted rate of GDP growth (total

and non-oil-gas) under baseline assumptions Results of simulations to estimate labor force deficit/surplus depending on

hypothetical long term TFP growth rates for optimistic and pessimistic cases (for non-oil-gas GDP) optimistic case: stronger economic growth, higher investment rate and higher LPR compared to baseline pessimistic case: moderate economic growth, low investment rate and baseline LPR

Results of growth accounting at regional level Estimated TFP contribution to GRP growth over 2001-2009 for Central and North-West

federal districts, as non of these two regions is major oil/gas producer we do not differentiate between oil and non-oil GDP

Results of simulations to estimate labor force deficit/surplus depending on a hypothetical long term TFP growth rates for optimistic and pessimistic cases (as defined for country-level simulations)

Annex I: Data sources Annex II. Economic Growth in Top Eight Resource-Rich countries

Labor force projections under different assumptions on Labor Participation rates (LPR) based on National Population Forecast (base line)

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

55,000

60,000

65,000

70,000

75,000

Labor force projections for baseline national population forecast, 2011-2030

Base case (average 2006-2008 LPR)EU25 Converge2.5% across the board5% increase old workers5% increase 40-59 years old

Year

Num

ber

of

work

ers

in 1

,000

Source: own calculations based on RF National Statistics Committee data

Labor force projections under different assumptions on Labor Participation rates (LPR) based on National Population Forecast (optimistic)

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

55,000

60,000

65,000

70,000

75,000

Labor force projections for optimistic national population forecast, 2011-2030

Base case (average 2006-2008 LPR)EU25 Converge2.5% across the board5% increase old workers5% increase 40-59 years old

Year

Num

ber

of

work

ers

in 1

,000

Source: own calculations based on RF National Statistics Committee data

Labor force projections under different assumptions on Labor Participation rates (LPR) based on National Population Forecast (pessimistic)

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

55,000

60,000

65,000

70,000

75,000

Labor force projections fpr pessimistic national population forecast, 2011-2030

Base case (average 2006-2008 LPR)EU25 Converge2.5% across the board5% increase old workers5% increase 40-59 years old

Year

Num

ber

of

work

ers

in 1

,000

Source: own calculations based on RF National Statistics Committee data

Results of Growth Accounting at Country Level: total GDP

I. Estimated TFP contribution to GDP growth over 2001-2010 and required TFP growth over 2010-2030 under baseline assumptions: to achieve targeted GDP growth (conservative 4.5 percent per year*), investment-to-GDP ratio equal to 2005-2010 average, and 3 scenarios for different LPRs

* Based on weighted average annual growth rate for the top four developing recourse-rich countries (Brazil, Chile, China and South Africa) during 2000-2009 (see Annex II)

ActualScenario 1: Base case LPR

est. for baseline population forecast

Scenario 2: 2.5 % increase LPR est. for optimistic

population forecast

Scenario 3: Base case LPR est. for pessimistic population forecast

2001-2005

2006-2010 2011-2020 2021-2030 2011-2020 2021-2030 2011-2021 2021-2030

Output 6.4 2.3 4.5 4.5 4.5 4.5 4.5 4.5Capital, adjusted 1.7 3.7 4.0 5.0 4.0 5.0 4.0 5.0Labor 1.3 0.6 -0.7 -0.4 -0.3 0.0 -0.9 -1.7TFP 5.0 0.4 3.3 2.8 3.1 2.5 3.4 3.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-15.0

-10.0

-5.0

0.0

5.0

10.0

4.7 3.35.9 6.4 4.2 6.9

5.93.7

-8.8

1.5

Est. factors contribution to GDP growth, 2001-2010

Capital contribution Labor contribution

Results of Growth Accounting at Country Level: non-oil-gas GDP

II. Estimated TFP contribution to non-oil-gas GDP growth over 2001-2010 and required TFP growth over 2010-2030 under baseline assumptions: to achieve targeted non-oil-gas GDP growth (assuming that oil and gas sector contribution will be on average negative 0.5 percent per year for 2011-2020 and zero percent for 2021-2030), investment-to-GDP ratio equal to 2005-2010 average, and 3 scenarios for different LPRs

ActualScenario 1: Base case LPR est. for baseline population forecast

Scenario 2: 2.5 % increase LPR est. for optimistic

population forecast

Scenario 3: Base case LPR est. for pessimistic population forecast

2001-20052006-2010 2011-2020 2021-2030 2011-2020 2021-2030 2011-2021 2021-2030

Output 5.2 2.1 5.0 4.5 5.0 4.5 5.0 4.5Capital, adjusted 0.9 2.9 3.6 4.8 3.6 4.8 3.6 4.8Labor 1.3 0.5 -0.7 -0.4 -0.3 0.0 -0.9 -0.7TFP 4.1 0.6 4.0 2.8 3.8 2.5 4.1 3.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-15.0

-10.0

-5.0

0.0

5.0

10.0

4.8 1.94.0 5.3 3.9 7.0 6.7

4.0

-8.4

0.7

Est. factors contribution to non-oil -gas GDP growth, 2001-2010

Capital contribution Labor contribution

Results of Growth Accounting at the Country Level:Simulated labor deficit/surplus depending on TFP growth rates (Optimistic case)

Assumptions: 6.0 percent non-oil-gas GDP growth 2.5 percent across the board increase in LPR Investment-to-GDP ratio in non-oil-gas sector is 25% of GDP

Interpretation: Domestic labor supply

will be sufficient if long-term productivity growth is about 4.5 percent per year over 2010-2030

0.5 annual productivity growth yields substantial labor force deficit

5.0 annual productivity growth yields small labor surplus

-180000

-150000

-120000

-90000

-60000

-30000

0

30000

60000

90000

-14-13-12-11-10-9-8-7-6-5-4-3-2-101234567

Labor, required annual growth rate

TFP, annual growth rate

Russia: Optimistic Scenario

Labor force deficit "-"/surplus "+" by 2020, mln. ppl

thousa

nd p

eople

%

Results of Growth Accounting at the Country Level:Simulated labor deficit/surplus depending on TFP growth rates (Pessimistic case)

Assumptions: 3.0 percent GDP growth Base case LPR Investment-to-GDP ratio in non-oil-gas sector is 15% of

GDPInterpretation: Domestic labor supply

will be sufficient if long-term productivity growth is about 3.2 percent per year over 2010-2030

0.5 annual productivity growth yields substantial labor force deficit

5.0 annual productivity growth yields notable labor surplus -100000

-80000

-60000

-40000

-20000

0

20000

40000

-15-14-13-12-11-10-9-8-7-6-5-4-3-2-10123456

Labor, required annual growth

rate

TFP, annual growth rateRussia: Pessimistic Scenario

Labor force deficit "-"/surplus "+" by 2020, mln. pplLabor force deficit "-"/surplus "+" by 2030, mln. ppl

thousa

nd p

eople

%

Results of Growth Accounting at Regional Level: Estimated TFP contribution to GRP growth over 2001-2009

I. Central Federal District (CFD): share of migrants in total number of employed was 5.4 percent in 2008, with the highest share of 10.3 percent for Moscow

II. North-West Federal District (NWFD): share of migrants in total number of employed was 2.8 percent in 2008

2001-2005 2006-2009

Output 8.4 1.5Capital, adjusted 5.0 10.6

Labor 1.0 0.1

TFP 5.8 -2.9

2001 2002 2003 2004 2005 2006 2007 2008 2009

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2.46.9

3.45.1 7.5 8.3

1.40.8

-10.1

CFD: Est. factors contribution to GRP growth, 2001-2009

Capital contribution Labor contribution

2001-2005 2006-2009

Output 7.7 2.7Capital, adjusted 2.2 1.2

Labor 1.3 -0.1

TFP 6.1 2.3

2001 2002 2003 2004 2005 2006 2007 2008 2009

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

5.0

6.9 3.6 7.0 6.63.7 7.4

6.4

-6.6

NWFD: Est. factors contribution to GRP growth, 2001-2009

Capital contribution Labor contribution

Results of Growth Accounting at Regional Level (I):Simulated labor deficit/surplus depending on TFP growth rates

Central Federal DistrictNorth-West Federal

DistrictRussian Federation*

Population, 2009, mln. ppl 37.1 13.4 141.9Employment, 2009, mln. ppl 19.1 7.2 68.1Share of labor migrants in total employment, 2008, %

5.4 2.8 3.4

Optimistic scenario: 6 percent average GDP growth, 2.5% increase in labor participation rate for optimistic population forecast, average investment ratio 25 percent of GDPEst. hypothetical labor force deficit "-"/surplus "+" under very concervative long-term TFP growth of 0.5 percent per yearby 2020, mln. ppl -16.6 -5.8 -63.3by 2030, mln. ppl -45.7 -15.5 -178.1TFP growth at which domestic labor supply will be about sufficient

4.4 4.1 4.5

Pessimistic scenario: 3.0 percent average GDP growth, base case labor participation rate, average investment ratio 15 percent of GDPEst. hypothetical labor force deficit "-"/surplus "+" under very concervative long-term TFP growth of 0.5 percent per yearby 2020, mln. ppl -9.6 -5.3 -36.5by 2030, mln. ppl -22.2 -13.6 -86.2TFP growth at which domestic labor supply will be sufficient

3.0 4.0 3.2

* Scenarios at national level are estimated for non-oil-gas GDP

Results of Growth Accounting at Regional Level (II):Simulated labor deficit/surplus depending on TFP growth rates

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

-12

-10

-8

-6

-4

-2

0

2

4

6

Labor, re-quired annual growth rate

TFP, annual growth rateCFD: Pessimistic Scenario

Labor force deficit "-"/surplus "+" by 2020, mln. ppl

thousa

nd p

eople

%

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

-10

-8

-6

-4

-2

0

2

4

6

8

10

Labor, re-quired annual growth rate

TFP, annual growth rate

CFD: Optimistic Scenario

Labor force deficit "-"/surplus "+" by 2020, m...

thousa

nd p

eople

%

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Labor, re-quired an-

nual growth rate

TFP, annual growth rate

NWFD: Pessimistic Scenario

Labor force deficit "-"/surplus "+" by 2020, mln. ppl

thousa

nd p

eople

%

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Labor, required annual growth

rate

TFP, annual growth rate

NWFD: Optimistic Scenario

Labor force deficit "-"/surplus "+" by 2020, mln. ppl

thousa

nd p

eople

%

Concluding observations

The analysis indicates that domestic supply of labor in Russian Federation could be sufficient to ensure long-term non-oil-gas growth rate of above 3.0 percent with moderate level of investments in non-oil-gas sectors (of 15% of GDP) if the country is able to sustain strong productivity growth rates of above 3.2 percent per year in a long-term;

Above 6.0 percent long-term non-oil-gas growth rate combined with investment rate of 25% of GDP in non-oil-gas sectors will require stronger TFP growth of about 4.5 percent per year in long term, which could be feasible for the country like Russia – example of Korea over the period of 1985-2008, when annual TFP growth averaged at about 4 percent, proves it’s possible;

The higher economic growth targets or lower TFP growth rates in a long-term could require larger capital investments or higher growth rates of labor force. The later will likely lead to a shortage of labor, which can be addressed through various policy interventions, including among others measures aimed at increasing LPRs, improving health/education outcomes, or attracting labor migrants from abroad;

The exercise yields results which are consistent at country and regional levels.

Annex I. Data sources

Population by age and territory

Official, GKS

Population projections 2010-2050

World Population Prospects, United Nations Population Division (updated in 2010)

Labor migration by territory and sector

"21 Century" Foundation/MIRPAL

Labor participation rates Based on official employment statistics by age group, GKS

Output GDP, PPP (constant 2000 US$), WB WDI

Non-oil GDP Est. based on CEM, WB 2005 and Gurvich et. al “Cyclical Fiscal Policy in Resource Rich Countries, ” HSE 2007, Moscow; includes oil and natural gas

Investments Gross Fixed Capital Formation, PPP (constant 2000 US$), WB WDI

Capital, national Level

Capital Stock adjusted for capital utilization, PPP (constant 2000 US$), “Unleashing Prosperity: Productivity Growth in Eastern Europe and Former Soviet Union, World Bank; after 2005 calculated using perpetual inventory method

Capital, regional level Calculated using actual shares obtained from official data on accounting (remaining) value of capital stocks

Employment by sector and territory

Official, GKS

Labor and capital shares Official input-output table, GKS

Annex II. Economic Growth in Top Eight Resource-Rich countries

GDP per capita, US$ 2009

GDP average annual growthWeighted (by GDP per capita) average annual

growth

1990-2000 2000-2009 2000-2009Brazil 8,230.3 1.9 3.3Chile 9,644.5 6.2 3.7China 3,744.4 9.8 10.3South Africa 5,786.0 1.6 3.6Above Four 4.5United States 45,989.2 3.3 1.8Australia 42,278.7 3.3 3.2Canada 39,599.0 2.7 2.1Above Three 2.4

Russia 8,684.5 -3.5 5.5

Source: WB WDI database, own calculations